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Beware Of Excessive Optimism

Aromatics, China, Company Strategy, Economics, Olefins, Polyolefins
By John Richardson on 30-Jan-2013

 

SEAmargins.pngBy John Richardson

CHEMICALS and polymer markets have enjoyed a very strong recovery in Asia since November/December, according to many of the traders we have spoken to.

“We are getting $150-200/tonne more for benzene and toluene in January compared with early November. There has been a strong recovery in confidences,” said a Dubai-based trader.

But a second Dubai-based trader, in this case in polyolefins, cautioned that the recovery was at least in part a relief rally.

“People were so sick of feeling depressed that all the good economic news has given them an excuse to feel good again,” he told us.

“I am far from convinced that it will last.”

The psychology of commodity markets is fascinating, but potentially very toxic for those who get taken in by the hype – either on the downside or the upside. For instance, earlier this month iron prices had more than doubled compared with early September. None of the commodity analysts the blog has spoken to in Perth, Australia, believe that the rally is justified and therefore sustainable.

But the optimism is so intense right now that chemicals analysts, referring to the cracker-polyolefins side of petrochemicals, are saying that the current recovery will at the very least be sustained throughout this year.

“I don’t believe that product spreads will weaken much during the rest of 2013, despite all the new capacity due on-stream in polyethylene (PE) and polypropylene (PP) from March-April, but they probably won’t improve,” one analyst told us.

“The reason is that demand will be good enough to absorb supply.”

He added that we are in a “news sweet spot” resulting from the Republicans agreeing to kick the US budget deficit crisis down the road and all the positive data emerging from China.

But what the blog cannot fathom is why, if the recovery is strong, why high-density variable cost margins in both Northeast Asia and Southeast Asia (see above chart) were so weak up until the second week of January.

Something is amiss…

Be careful out there.